fundamental alert

New Zealand Economy Will Contract 2% in 2009, Says IMF

Thursday, 26 March 2009 01:41:39 GMT  |  Luis Gil, DailyFX Research

In a report filed by the International Monetary Fund (IMF) the Washington-based body said that the New Zealand economy will contract by 2.0% this year. “The near-term outlook is weak,” they mentioned. “Households are constrained by high debt levels, falling house and equity prices and uncertain employment prospects,” they added.

The startling words come after Bill English, New Zealand’s Minister of Finance, said that the current account gap is “uncomfortable large”. Indeed, the actual figure for the current account balance in the final quarter of 2008 came in at -4.026, surprisingly better than in the three-month period prior. Despite what would look to be as a positive sign, the deficit-GDP ratio actually became weaker, coming in at -8.9% from -8.6% the period prior.

Claims of weakness in the country are legitimate. Now, in its fifth straight quarter of contraction, the New Zealand economy has shed thousands of job. In the final three months of 2008, their unemployment rate jumped 0.4 percentage points to 4.6%, the highest level since 2003. Their Treasury department predicts that it will get worse. They have forecast that by early 2010 the jobless rate may jump to an 11-year high of 7.2%.

One “key vulnerably” is the country’s substantial level of short-term financing from abroad. With the central bank slashing rates by 5.25% since July, foreigners have been continuously less incentivized to invest in these debts with maturities of less than one-year. The IMF may have been too cautious here. Albeit this may seem to be a risk on an absolute basis, the fact that short-term rates abroad are much lower than those in New Zealand may actually direct a greater amount of these foreign cash flows towards this South-Pacific economy.

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